Recovering One’s Assets from FTX’s Bankruptcy, and Even Making a Big Profit? This article is sourced from an article by Niamh Rowe in Fortune magazine titled “Hedge funds that scooped up FTX bankruptcy claims are looking at 9-figure paydays. One investor shares how he could rake in $25 million,” compiled, translated, and rewritten by ForesightNews.
(Table of Contents:
Trading bankruptcies is risky, but also an opportunity
A high-stakes gamble with a return rate exceeding 700%
Trading bankruptcy claims is not easy)
When rumors began circulating on the internet about FTX’s financial troubles, FTX customer Louis d’Oringy didn’t pay much attention. Instead, he shifted his focus back to his friends he was hosting at his Miami Beach apartment.
“It’s fake news,” he recalled saying. He set aside his laptop and spent a relaxing day at the beach, away from the increasingly anxious cryptocurrency community.
But a few hours later, the atmosphere changed. He returned home to see tweets of FTX customers’ withdrawal requests being denied.
“Things got more hectic,” he recalled. As the sun set through his floor-to-ceiling windows, the 31-year-old wondered what would happen next.
“And then,” he remembered, “suddenly we couldn’t withdraw the money we had in FTX.”
D’Oringy is one of over a million victims trying to recover their lost funds from FTX. The exchange collapsed after co-founder Sam Bankman-Fried’s financial fraud was exposed.
“At the time, it felt like doomsday in the crypto world,” he said. “The outlook was very pessimistic, and no one believed Bitcoin would hit a new all-time high again.”
But in the darkest moment of the crypto market, d’Oringy’s mindset began to shift.
Louis d’Oringy has purchased over 1,000 FTX bankruptcy claims since December 2022.
“My view was that Sam didn’t have enough time to execute this fraud and lose the money. I was very confident that they would be able to recover a large sum,” he said.
D’Oringy saw an opportunity: many creditors like him were hoping to at least get back some of their funds, but there was no clear information or guarantee on how the exchange would raise the $8.7 billion funding gap announced during the bankruptcy. In other words, creditors might be willing to sell their claims at a low price.
So what would happen if they could hedge their own claims?
D’Oringy had previously purchased some Celsius bankruptcy claims with his boutique fund Arceau, but he was still a newcomer in this field. Most investors he knew didn’t want to get involved with FTX and weren’t willing to invest in these claims.
But in the weeks following the Miami incident, d’Oringy started using his own money to buy FTX positions from hedge funds and requested liquidation.
“Regarding the bankruptcy, we didn’t know any more information. We took a big risk, and I just said, ‘Let’s do it,'” d’Oringy told Fortune magazine.
Trading bankruptcy claims is a high-risk, high-reward strategy. With bankruptcies like Lehman Brothers, Enron, and General Motors, debt traders are believed to have made billions or even tens of billions of dollars in profit. But more often than not, the claims end up being worthless.
“The final outcome was much better than I imagined,” he said.
When a company goes bankrupt, creditors face a lengthy bankruptcy process in court and can’t guarantee how much of their claims they will recover. Instead, many choose to immediately sell their claims for cash to buyers willing to take on the risk of the claim value plummeting, and the buyers’ losses depend on how much debt the bankruptcy trustee can recover.
Since FTX filed for Chapter 11 bankruptcy on November 11, 2022, the exact timing and value of the claims trading have been quite complex. Industry traders told Fortune magazine that some claims trades are conducted on online platforms, some are private transactions, and buyers don’t have to immediately submit transfer requests, resulting in delays. Some claims trades are merely self-reported as their own claims.
As of March 28, there have been 49 transactions on the industry’s main online trading platform, Claims Market, exchanging claims worth over $439 million. At the same time, hedge funds have purchased heavily discounted claims worth over $2.3 billion, according to court records as of March 20.
While the bankruptcy court has not determined the specific date for creditors to receive payment, it appears likely that they will receive full repayment. “It looks like customers can expect to be fully repaid,” Bankman-Fried told the Manhattan court during the hearing on Thursday.
When the claims were initially approved, creditors sold them at a low price. Over 60 transactions with a total value exceeding $1 million have taken place, sold at around 10% of their original value in November 2022, now reaching as high as 93%, indicating increasing confidence in repayment.
Meanwhile, two individuals familiar with the claims trading situation told Fortune magazine that due to the rise in cryptocurrency values and the sale of artificial intelligence startup Anthropic shares held by FTX for over $880 million, the value of these claims may exceed their initial value, reaching 120% to 140%.
Buyers of claims told Fortune magazine that the appointment of John J. Ray III as the new CEO of FTX during the bankruptcy application sparked interest in the claims. “He immediately started selling assets that were uncertain in terms of price volatility. Institutional claim buyers like this approach because they don’t want Bitcoin,” d’Oringy explained.
According to data submitted in FTX’s case report, the exchange has recovered approximately $7 billion in assets to date, including liquidated cryptocurrencies, 38 properties in the Bahamas, and $2.6 billion in cash.
This estate includes approximately 59 million SOL tokens and 21,482 bitcoins, which have increased by approximately 1,000% and 343%, respectively, since the company filed for bankruptcy. FTX plans to sell 41 million SOL tokens to institutional investors at a price 68% lower than the current market price, valued at approximately $7.65 billion at the time of this article’s release. This has angered some victims, including Sunil Kavuri, who criticized Bankman-Fried for “constantly lying and saying we will all be adequately punished.”
As of March 20, according to Chapter 11 filings, d’Oringy has purchased claims worth approximately $29 million. He stated that these claims were purchased with personal funds for $3.5 million: “This is an investment from my family office and some friends.” The return on this investment exceeds 700%.
D’Oringy bought his first claim during Christmas with his family. He recalled his parents’ worried expressions, joking that the whole family might be bankrupt by next Christmas because of his gamble. According to the contract seen by Fortune magazine, this claim was valued at nearly $3 million and was delivered on December 28, 2022, at 6% of its original value.
So far, the buyers expected to receive the highest returns from the remnants of FTX are hedge funds specializing in distressed debt. As of March 20, Attestor, Baupost, and Farallon have purchased claims worth over $520 million, $518 million, and $346 million, respectively, leading the competition. It is confirmed that these funds used other entity names for their purchases.
Another key player in this high-stakes game, and also a friend of d’Oringy, is Thomas Braziel, a bankruptcy claims broker at 117 Partners who represents some of the largest hedge funds in the market for claim purchases. Braziel said his first transaction was on November 12, 2022, before the bankruptcy was officially filed. He spent approximately $240,000 to purchase $8 million in claims (around 3% of their declared value), and another transaction spent approximately $210,000 to purchase $3.5 million in debt.
The current valuations are far different from the valuations when claim buyers almost faced a disaster on April 27 last year.
In a Zoom call with a Singaporean debtor, d’Oringy was close to finalizing a $3 million claim purchase agreement. During the call, there was news that the US Internal Revenue Service had filed a $44 billion claim against FTX, accusing it of evading taxes.
“You know, during the call, we were terrified,” he said. But he ultimately decided to purchase the claim. “It was really, really scary.”
However, FTX has launched a legal battle against the claim, requesting the court to dismiss it: it would “likely indefinitely halt the debtor’s progress and any distribution to customers and other creditors.” In other words, since the IRS claim would make defrauded victims pay out of their own pockets, it is unlikely to be realized, according to sources familiar with the matter who spoke to Fortune magazine.
In July, FTX opened its public portal for customers to file claims. But in the early stages of the process, information about which assets could be liquidated or how to verify claims was limited. D’Oringy said it seemed like many people were crowd-sourcing KYC (Know Your Customer) through Twitter, as a temporary solution.
Braziel said, “Buying claims is really, really difficult,” and he stated that at least two or three of the claims he purchased turned out to be fraudulent.
Due to the speed of verifying claims, d’Oringy purchased 40 claims in the first year of trading. This gave him another idea: to expedite the due diligence process through automation. In December last year, he co-founded his own portal, FTX Creditor, which he describes as a “bespoke CRM, KYC, and due diligence solution.” He said the portal shortened the verification process from several days to 30 minutes. The company currently has 14 employees spread across continents, answering creditors’ calls 24/7.
The company specializes in handling claims below $100,000 and aims to provide a convenient way for retail investors to complete sales over a 30-minute phone call, avoiding getting stuck in lengthy transaction confirmations.
Public records show that since December, FTX Creditor has purchased nearly 1,000 claims worth around $100 million. Assuming a purchase price of 70% of the debt, this means the company will make a profit of approximately $30 million, some of which may come from the claims d’Oringy purchased early on.
However, d’Oringy explained that the increase in claim values has slowed down the trading process. Nevertheless, according to a contract seen by Fortune, claims worth over $6 million have been purchased in the market just this week, and Braziel is still buying claims at a 70% discount.
D’Oringy plans to continue operating FTX Creditor after FTX, but once these claims are repaid, he will take a vacation.
Was investing in these claims a carefully considered smart move? Perhaps. But to d’Oringy, the occurrence of these situations was purely accidental. He used a term that is quite different from smartness: luck.